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Investors took a breather as January's stock-market festivities gave way to a quiet first week of trading in February. But equities did rise slightly, bringing the broad market to its sixth straight week of gains.

Megacaps were the exception, with the Dow Jones Industrial Average inching down, though it flirted with 14,000 several times before closing below that level. There was little market-moving earnings, economic or political news. So, without an obvious cue, equities orbited tightly around the closing levels of the prior week.

Last week, the Dow lost 0.1%, or 17 points, to 13,992.97. It remains about 172 points from the all-time high. The Standard and Poor's 500 index added five points, or 0.3%, to 1517.93, and a 52-week high. It is off 3% from its all-time highs. The Nasdaq Composite rose 15, or 0.5%, to 3193.87.

With the Dow unable to punch through to record heights last week, as many were hoping it would, two trading camps have developed: those who expect this to be a pause, versus those who are looking for a temporary pullback in coming weeks after January's furious 5%-to-6% rise.

"Everyone is still trying to figure out if that was for real," says Doreen Mogavero, CEO of broker-dealer Mogavero. "There's been a lot of money on the sidelines for a long time and those investors—whether they believe the rally or not—know they have to do something with the money."

Many money managers are "behind the eight-ball" after January's big jump caught them unaware, says Darren Chevitz, research director at Jacob Asset Management. "They are praying for a pullback, so they can get in." Given the market psychology, a pullback could be dramatic but short-lived, he adds.

Because the market is nearing all-time highs, says Mogavero, the mostly quiescent volatility probably will increase in coming weeks: "People will be nervous about getting in at new highs." The tug of war between the two camps will intensify.

Friday,
McDonald's MCD -0.04%McDonald's Corp.U.S.: NYSEUSD99.96
-0.04-0.04%
/Date(1425412826121-0600)/
Volume (Delayed 15m)
:
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P/E Ratio
19.51953125Market Cap
96111901855.4688
Dividend Yield
3.402041224734841% Rev. per Employee
62366.6More quote details and news »MCDinYour ValueYour ChangeShort position
(ticker: MCD) said that global same-store sales dropped a worse-than-expected 1.9% in January on slowing demand overseas. Mickey D's stock managed a small rise of 0.2%, to 94.87, despite that bad news, notes Mark Lehmann, president of JMP Securities in San Francisco. More importantly, that the market shrugged off such news from a Dow member is a measure of the strength of the 2013 rally, he says, adding that the path of least resistance appears to be higher.

A good deal of the market's more recent ardor for its rivals can be traced to decisions the two made in 2012 to hive off various parts of their businesses to enhance shareholder value. That came in response to market restlessness over what businesses are strategic fits for a pharma company.

Both Pfizer and Abbott are viewed by institutional money managers as more willing than Merck to entertain major moves to increase shareholder value. Merck's chairman and CEO, Kenneth C. Frazier, so far doesn't seem amenable to making such changes.

Merck's reticence might weaken by the end of this year, however, particularly if its pipeline challenges worsen. With a stock that hasn't done much while rivals have galloped ahead, it wouldn't be a surprise if shareholders start to agitate for things like a spinoff of Merck's own animal-health business, or its consumer-health division, which sells well-known brands like Claritin and Coppertone.

If the comments in a recent survey of 167 money managers conducted by ISI Group—after Merck's fourth-quarter results were released Feb. 1—are any indication, the clamor for the company to do something will rise.

ISI pharma and biotech analyst Mark Schoenebaum says the survey suggests that many investors are contrasting Pfizer's moves with Merck's lack of similar ones. "There seems to be an emerging group of investors who'd like Merck to follow Pfizer," he observes.

Here's one survey response: "Zoetis showed the market's appetite for animal health. Merck's the No. 2 player. Significant value creation potential for a company in desperate need of some positive actionable catalysts."

The company has made it clear, adds the ISI analyst, that such changes aren't on the agenda. "I don't expect it to happen quickly…" Schoenebaum says, adding that if Merck's pipeline doesn't deliver, it will follow Pfizer and Abbott.

Both Merck's fourth-quarter results and Feb. 1 earnings call brought mostly bad news. The company announced a possible year-long delay in seeking regulatory approval for odanacatib, a potential blockbuster osteoporosis drug, to 2014 from the first-half 2013 target. That, combined with plunging sales of newly off-patent Singulair, is increasing uncertainty about Merck's pipeline. Since the news, the stock is down 5%. It closed at $41 Friday.

In response, a Merck spokesman said that the animal-health and consumer divisions complement its core business. The company intends to grow these businesses to enhance its overall performance.

Merck expects 2013 earnings per share to fall almost 6%, to $3.60-to-$3.70. The stock is relatively cheap at a price/earnings ratio of 11 times. Given its substantial underperformance, the cheaper it gets, the more likely an activist investor or two will show up at Merck's doorway.

At Friday's close of $37.22, however, the stock looks stretched, given the uncertainties of Obamacare reimbursement for hospitals, and HCA's fourth-quarter results, which were more checkered than they seem at first blush. EPS—excluding extraordinary items—beat expectations, but organic revenue growth may be weaker than it looks. Leverage is rising; profit margins are falling; and earnings before interest, depreciation, and amortization fell from year-earlier levels.

Meanwhile, HCA continues to fund special dividends, a total of $4.50 per share last year, nearly $2 billion, mainly through debt, giving big gains to Bain Capital Partners and
KKRKKR -0.5932203389830508%KKR & Co. L.P.U.S.: NYSEUSD23.46
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Volume (Delayed 15m)
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19253366689.6031
Dividend Yield
5.949851253718657% Rev. per Employee
5431960More quote details and news »KKRinYour ValueYour ChangeShort position
(KKR), part of the private-equity group that brought HCA public in March 2011, after taking it private in 2006. That group sold about 32 million shares in December for around $1 billion, but Bain and KKR still own about 40% of HCA.

Investors who look beyond last Wednesday's fourth-quarter headlines might see figures that should make them more cautious, given the stock's run-up. For example, EPS of 91 cents (excluding one-time items) topped analysts' expectations of 82 cents, but were lower than the 94 cents a year earlier, even as consolidated fourth-quarter revenue rose 8.5%. But revenue on a "same-facility" basis grew only 2.7%, according to Vicki Bryan, a credit analyst at Gimme Credit. Calculating on the same-facility basis neutralizes the effect of recent acquisitions.

Moreover, management gave guidance for 2013 that was weaker than expected and expressed caution about what Obamacare will mean for profits. HCA said that revenue would be $33.5 billion to $34.5 billion in 2013, slightly above the $33 billion recorded last year, but projected flat-to-down adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $6.25 billion to $6.5 billion, versus $6.5 billion last year. Adjusted EPS of $3.00 to $3.30 would be below 2012's $3.71 (again excluding items).

Those results don't support the huge stock-price rise and suggest that investors are expecting a great deal from Obamacare a year from now. On the quarterly earnings call, HCA acknowledged that it's difficult to predict how much health insurers will pay for all those newly insured people the stock market is so excited about.

There are other worrisome aspects to 2012 results. While the company noted at the top of the news release that same-facility admissions rose 4.3% in the last quarter, investors must read to the end to find that same-facility inpatient revenue per admission fell 1%. That probably reflects pricing weakness.

Emergency visits rose 12.7%, but Bryan notes, ER traffic "generates lower-margin revenue that is harder to collect" because ER visitors are more likely to have less or no insurance. Unsurprisingly, provisions for doubtful accounts soared 67% in the fourth quarter, to $1.1 billion, from the year-earlier total. That hurt: Quarterly Ebitda margin dropped a significant 2.1 percentage points, to 19% of revenue, or $1.6 billion out of $8.4 billion.

Debt, meanwhile, thanks mainly to the special dividends, increased by $2 billion, to $29 billion. It's now higher than the company's $28 billion in total assets. Though down from 4.5 times in the year-earlier period, the debt-to-Ebitda ratio rose to 4.4 times from 4.1 times in the third quarter.

According to Bryan, HCA has paid about $9 billion in mostly debt-funded special dividends and distributions to shareholders since 2008, eclipsing cumulative cash flow and earnings since then and sending shareholders' equity value to a negative $9.7 billion.

HCA's 2013 P/E of 12 times wouldn't be demanding if the "E" part of the equation were more certain. There is such a thing as too much of a good thing. Dividends fueled mainly by debt and negative equity should be a red flag for investors.

An HCA spokesman says the debt-to-adjusted Ebitda ratio is down from 6.4 times shortly after the company went private. "We continue to follow a prudent plan that balances stockholder return with maintenance of a strong balance sheet, while investing in our facilities and pursuing our clinical quality agenda," he adds.

A hospital business can take on more debt than, say, a car company, but if interest rates jump, or Obamacare isn't as remunerative as HCA's stock price indicates it will be, times could get tougher for the company. Then, that debt load would feel like an albatross.